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How Are Bridging Loans Being Used in the Current Market?
A recent spike in bridging finance activity has seen loan volumes once again come close to pre-pandemic peaks. Even in times of economic uncertainty, bridging finance continues to serve as an affordable and attractive alternative to conventional high-street loans.
Equally, the growing availability of bridging loans is broadening the appeal of responsible short-term borrowing to a more diverse audience than ever before. There are more independent specialists offering bridging loans in the UK than ever before, spurring the kind of competition that has brought average monthly interest rates to all-time lows.
But what are the specific applications that bridging loans are currently being used for? What are the most popular uses for bridging finance in the UK as of Q4 2022?
Investment property purchases
For some time now, the most common application for bridging finance has been purchasing investment properties. Ferocious competition in the UK housing market is prompting more investors than ever before to seek fast-access funding for time-critical property purchase opportunities. Bridging finance provides new and established investors alike with the opportunity to beat competing bidders to the punch and to purchase properties that would not be considered eligible for a conventional mortgage.
Chain break
The latest figures from Bridging Trends suggest that the second most common application for bridging finance as of right now is funding chain breaks. This is where homeowners looking to relocate effectively use bridging finance to become cash buyers. They borrow against the equity they have tied up in their current home; the funds needed to purchase their next property are released within a few days, and the transaction is wrapped up as promptly as possible. Property chains have become increasingly complex and fragile as of late as competing bidders go to extremes to beat their rivals to the punch.
Light and heavy refurbishments
Another popular use for bridging finance is funding light and heavy property refurbishments. Homeowners, for example, often take out a bridging loan to cover significant improvements to their properties before listing them on the market for their maximum value. Elsewhere, investors looking to flip homes for profit routinely use bridging finance to fund their projects before selling their properties for the biggest possible profit. As bridging finance is designed to be repaid within a few months, it is ideal for short-term undertakings like these.
Auction purchases
Purchasing properties at auction can pave the way for significant savings. It is not uncommon for homes and business properties to sell at auction for less than £50,000, making them ideal as ‘fixer-upper’ projects. But as the full balance on auction property purchases needs to be paid within 28 days, no conventional mortgage or property loan is viable. Bridging finance, which can be organised and accessed within a few working days, has become the go-to for many thousands of people looking to pick up bargain properties at auction.
Business purposes
Business owners looking to cover time-critical gaps in their finances have been turning to bridge finance specialists in record numbers. Bridging finance is uniquely flexible and accessible, with no specific limitations on how the funds can be allocated. From purchasing stock to upgrading business equipment to covering staff wages and tax bills, bridging finance has a broad range of applications for business owners and SMEs. It can also be secured against a wide variety of assets of value, making it more accessible than many comparable types of secured business loans.
How a Bridging Loan Can Help You Secure Your Dream Property
Tracking down and buying your dream home is never easy. In times of unprecedented housing shortages, competition for desirable homes in most parts of the country is at an all-time high. Unexpected price increases by sellers or the possibility of being outbid by a rival bidder are only two reasons why transactions can and do fail.
In fact, some estimates suggest that as many as 25% of planned property purchases result in disappointment.
With conventional mortgage completion times averaging around 12 weeks, there is ample time for things to go wrong along the way. Traditionally, cash buyers have been afforded the kinds of privileges that have given them a major advantage over mainstream homebuyers.
Today, it is a set of privileges that can be accessed by anyone who owns their current home. If you are planning to relocate and looking to escape the trappings of traditional property chains entirely, a low-cost bridging loan could be just the thing.
How a bridging loan can speed up a transaction
A bridging loan is effectively a fast-access, short-term loan that can be used for any legal purpose. In this context, the funds needed to purchase your dream home are secured against your current property. The more equity you have tied up in your current home, the more you can borrow in the form of a bridging loan.
With all the essential paperwork in place, bridging finance can be organised within a few working days. This means being able to ‘jump the queue’ and beat competing bidders to the punch, with all the flexibility and convenience enjoyed by a cash buyer.
You buy your new home for cash (which may pave the way for a generous discount), you leave your previous home on the market for as long as it takes to sell for its full value, and you repay the bridging loan when your previous home sells. In the meantime, the bridging loan accrues interest at a rate as low as 0.5% per month, making it a much more affordable transaction than any conventional mortgage.
As the name suggests, the facility can be used to ‘bridge’ the gap between buying your dream property and selling your current home. Whereas the process would usually work the other way around (sell first, buy later), bridging finance allows you to buy first and sell later. And in doing so, reduce the risk of having to watch your dream property slip through your fingertips.
Bridging loans: common-sense care and caution
As a bridging loan is issued in the form of a secured loan, you face the risk of your property being repossessed if you do not fulfil your repayment obligations. This is something that must be taken into account and carefully considered before applying for any type of secured loan.
Bridging finance is designed to be repaid in the form of a single lump sum payment, typically 1 to 12 months after being issued. You therefore need to be confident that your previous home will sell successfully during this time in order to provide you with the funds needed to repay it.
A bridging loan is a strictly short-term facility and should not be taken up with long-term repayment in mind. The more promptly a bridging loan is repaid, the lower the interest and borrowing costs that apply.
Before applying for a bridging loan with the purchase of a property in mind, consult with an independent broker to discuss the options available and your suitability for bridging finance.
Small-Scale Property Development FAQs: Key Questions Answered
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- What qualifies as a ‘small-scale’ development?
The designation ‘small-scale’ in relation to property developments does not actually have a clear or formal definition. Even so, most regard a small-scale development as one that is made up of around 5 to 20 units (such as flats), capable of generating a profit of say £100k to £500k over a period of 18–to 24 months.
- Are small-scale development projects comparatively simple?
Compared to large-scale development projects, the answer is yes. Small-scale developments tend to be less complex and labour-intensive. But when compared to a standard flip or refurb, even a small-scale property development project can be a much more extensive undertaking. Costs are significantly higher and the scope of the work is greater, calling for the involvement of a knowledgeable and experienced project manager.
- What are the most profitable small-scale development projects right now?
It depends entirely on your knowledge, experience, expertise, budget, and location. Even so, conversion projects (where existing properties are repurposed) tend to be the preferred option for new and aspiring developers. Across the UK, there is a huge and growing contingency of abandoned and unused commercial buildings with enormous potential for residential conversions, many of which have the potential to be exceptionally lucrative.
- Are first-time developers inherently at a disadvantage?
Yes, at least when it comes to funding their first property development project. This is due to the fact that many specialist development finance products are issued exclusively to experienced developers with an established track record. Many lenders exclude first-time developers from consideration, reducing the number of viable funding options available. Even so, it is perfectly possible to fund almost any type of small-scale development project with a bridging loan, a secured commercial loan, or any other viable commercial mortgage.
- How difficult is it for new developers to qualify for funding?
Newcomers to property developments looking to get their first projects on the ground are strongly recommended to seek independent broker support at an early stage. An experienced broker can help pair your requirements with an appropriate lender while at the same time negotiating on your behalf to ensure you get an unbeatable deal. In addition, your broker will help you prepare a strong and convincing application, increasing your likelihood of qualifying for the funding you need.
- Is it not cheaper to apply for funding directly with a lender?
No, and for two important reasons. Firstly, brokers know exactly how to negotiate the kinds of deals that would not be accessible directly from any lender. They also have established relationships with lenders that can lead to significantly reduced borrowing costs and lower fees. In addition, many development finance specialists offer their services exclusively via broker introductions. This means that many of the best deals on the market may be completely inaccessible if you do not apply with the help and support of a broker.
- How are development finance loans issued and repaid?
Specialist development finance differs from bridging loans and other commercial mortgages in that the funds are transferred in a series of instalments. The release of each instalment is tied to the completion of a specific phase of the project, overseen by a surveyor (hired by the bank and paid for by the borrower). Most development finance loans are designed to be repaid within 6 to 24 months, during which interest accrues on a monthly basis. The full balance is either repaid upon the sale of the completed development or by transitioning the loan to a longer-term repayment facility (like a buy-to-let mortgage).
How to Fix a Broken Property Chain with a Bridging Loan
For some time, investment property purchases have been the most common use for bridging finance in the UK. More aspiring and established investors than ever before are looking to leverage the explosive competition in the UK housing market, using fast-access bridging loans to fund time-critical property purchases.
Meanwhile, a growing contingency of homeowners is turning to bridge finance for an entirely different reason. Second only to investment property purchases, breaking free of property chains is now the second most common reason for taking out a bridging loan.
During the first six months of the year, at least one in every five bridging loans was issued for this purpose.
The risk of broken property chains
Never has competition for quality homes in desirable parts of the UK been greater. Even so, there are no guarantees at any point during the property purchase process that the transaction will go through.
Incredibly, research suggests that up to 25% of all residential property sales fall through due to broken property chains. The longer and more complex the property chain, the higher the likelihood of one or more links being compromised.
A property chain is defined as “a line of buyers and sellers linked together because each is selling and buying a property from one of the others.” When buying or selling a home, you are at the mercy of every other buyer and seller within the same property chain.
Should any property sale or purchase fall through before your own transaction is complete, it may be rendered unviable.
Why do property chains collapse?
Nobody lists a property for sale with the intention of the transaction falling through. Even so, there are many reasons why a property chain can and does collapse with such regularity.
Typical examples of this include the following:
- A change of circumstances for the buyer or seller, rendering them unable to continue with the transaction.
- The buyer or seller of a property simply changes their mind at some point during the deal and withdraws from the chain.
- A competing bidder submits a higher bid that is accepted by the sellers, despite them having already agreed to sell the property to someone else.
- Mortgage applications may encounter disruptions and delays, or a decision in principle may be reversed for any number of reasons.
- A survey conducted on a property may uncover unexpected problems and structural issues, rendering the agreement null and void.
In each of the above instances, the property chain comes crashing down and brings all sales and purchases therein to a grinding halt.
Fixing property chains with bridging finance
This is where bridging finance can offer an invaluable lifeline to those looking to escape the trappings of the conventional property chain. With a bridging loan, you borrow money against the value of your current home, which is used to purchase your next property for cash.
Along with speeding up the purchase process, these types of transactions are in no way reliant on any other buyers or sellers. In addition, cash buyers are often afforded additional incentives by sellers looking to complete transactions on their homes as quickly as possible (often up to 2% off the home’s standard purchase price).
For faster and more convenient than a conventional mortgage, a bridging loan can be organised and accessed within a few working days. The full balance is then repaid when the borrower’s previous property sells for its full market price, a few weeks or months down the line.
“I’m not surprised that chain-break finance is one of the top reasons to use bridging loans. Property transactions are booming, and we’re seeing a large number of solicitors trying to exchange and complete on the same day,” said Dale Jannels, Managing Director of Impact Specialist.
“This inevitably will result in people pulling out of purchases late on, and therefore clients need a short-term loan to fill the gap their buyer left behind.”
How Breathing Space Regulations Can Adversely Affect Lenders
Throughout the COVID-19 crisis, tenants and mortgage payers were afforded additional protection from the potential consequences of temporary financial turbulence. Where individuals, families, or businesses were unable to meet their repayment obligations through no fault of their own, they were governed by emergency government legislation. At least, to such an extent as to give the person time to get their affairs in order and to get back on top of their financial commitments.
Recently, figures published by the Ministry of Justice suggest that things are returning to normal. In terms of the basic numbers, warrants and repossession orders are once again back to levels similar to those recorded prior to the pandemic. A significant rise in the number of repossessions commenced or carried out in March was recorded (compared to the same quarter last year), and the ASTL has reported a 31.5% increase in the value of loans in default.
Contrary to popular belief, lenders always approach repossession as a last resort option. Repossession is a costly, complex, and time-consuming process, which ultimately leaves all parties involved out of pocket. Even so, it is a necessary mechanism to enable lenders to safeguard themselves from heavy losses.
The debt respite scheme
Following the withdrawal of COVID-related protections from repossession and eviction, the government introduced the Debt Respite Scheme, also referred to as Breathing Space; the policy came into force on May 4, 2021.
According to the government, the new regulations were introduced to give individuals the time they need to enter sustainable debt solutions and to encourage people to seek advice on their debts and outgoings.
In short, the policy provides those who qualify under its terms and conditions a period of 60 days of ‘breathing space’. During this time, their creditors (and the collection agents representing them) cannot issue any demands or progress with enforcement. However, all interest, fees, and penalties that apply during this 60-day suspension period still apply.
But what seems to have been overlooked by those who drafted the legislation is how a 60-day ‘breathing space’ period can be somewhat disproportionate, from one loan type to the next. The same 60 days apply (if the borrower qualifies), irrespective of whether they are repaying a 30-year mortgage or a six-month short-term loan. In the case of the latter, 60 days would be a full 30% of the entire repayment period—the equivalent of a ten-year hiatus on a 30-year mortgage.
Either way, the latest figures published by the Insolvency Service suggest that the vast majority of those registering under the Breathing Space are perhaps not using the facility in the way it was intended to be used. Of the 49,017 cases accepted during the programme’s first year, 96% of those taking advantage of the scheme ran out of time within the 60-day allotted period. Just 668 entered into a viable debt management solution, while only 222 came up with ways to repay their debts within 60 days.
All of this has prompted calls for the terms and conditions of the policy to be revisited to protect lenders from potential losses. Breathing Space is used most broadly as a way to forestall repossession or eviction, as opposed to its intended purpose of a sustainable debt solution. Lenders have the option of launching counter-challenges against breathing space cases, but the process is long-winded, complicated, and costly.
There is no argument or contention among lenders that well-intentioned debtors should be given the support they need to weather turbulent financial times. The issue is that with policies like Breathing Space, the programme is wide open to abuse and exploitation.
Bridging Loan Borrowing Is Up 22%, But Why?
All indications point to another buoyant year for bridging finance, following another major spike in loan applications. On the whole, the total value of the UK’s bridging sector has grown by as much as 22% over the past 12 months alone. More private borrowers and commercial customers are taking out bridging loans than ever before, but why?
Bridging finance differs from most conventional loans and mortgages in that it is a strictly short-term facility. Typically issued over a term of 12 months or less, bridging finance is also comparatively quick and easy to arrange. With all the essential paperwork and supporting documentation in place, the funds that are needed can be accessed within a few working days.
Coupled with monthly interest as low as 0.5%, the appeal of bridging finance is easy to understand; the more difficult and expensive it becomes to borrow money from major High Street banks, the more business flows the way of the UK’s thriving bridging sector.
A major spike in loan completions and applications
The most recent raft of figures suggests that between Q1 and Q2 this year, total bridging loan values swelled from £156.8 million to £178.4 million. This represents a growth of 13.8% over the course of three months alone. Year-on-year, total lending volumes skyrocketed by approximately 21.8% between Q1 2021 and Q2 2022.
Even so, there is still some way to go until the sector reaches pre-pandemic performance, having hit an all-time record performance of £180.9 million in Q4 2019.
As for why so many people are taking their business to bridge loan specialists, purchasing investment properties remains the single most common application for bridging finance. Following the trend of several previous consecutive quarters, investment property purchases once again accounted for almost a quarter of all bridging loans taken out in Q2 this year. This includes landlords purchasing properties to let out to tenants and investors looking to flip homes for capital gains.
Meanwhile, 21% of bridging loans issued in Q2 were used to help homebuyers break out of property chains. With competition in the housing market at an all-time high, more homeowners than ever before are using bridging finance to tap into the equity they have tied up in their homes and beat competing bidders to the punch.
Funding significant property improvements and refurbishments remained a popular use for bridging finance during Q2, accounting for around 30% of all loans issued.
A gradual decline to come?
Speaking on behalf of Henry, Director Geoff Garrett suggested that while the immediate outlook for the bridging sector is bright, the coming months could bring a gradual slowdown in overall activity.
“An increase in bridging loans does not signify that people are struggling financially. Such loans are taken in order to fund major purchases or investments but can only be granted to people who can prove they have larger, longer-term loans coming their way, such as a mortgage,” he said.
“Instead, an increase in bridging loan totals indicates that the systems in place are struggling to keep up with demand and can’t match the desired pace of buyers and sellers. The housing market, for example, is moving more slowly than it did a year ago, even two and three years ago. At the same time, buyer demand is extraordinarily high, and activity is through the roof. This causes delays in the conveyancing and buying process, which, in turn, increases the need for bridging loans.”
“However, with the cost of living and interest rates rising so rapidly, one has to expect to see a slight drop-off in buyer demand and, therefore, a decline in bridge financing over the next year or so.”
Do Lenders Have the Right to Withdraw Mortgage Offers?
With the economy going into free fall and the housing market in chaos, Kwasi Kwarteng’s mini-budget has done little to appease the fears of buyers and lenders alike.
The Bank of England has stated that they “would not hesitate” to increase the interest base rates yet again in an attempt to protect the falling value of the pound. Unfortunately, this will lead to the inevitable result for mortgage lenders, who predict that offering competitive interest rates to customers will be far too expensive.
With this in mind, people have many questions regarding the future of the mortgage market and what it means to them. Today we answer a few of these questions.
Will my lender withdraw my mortgage offer?
This is a question paramount to every buyer’s mind who has already been offered a mortgage deal by their lender. In principle, lenders will abide by the offer they have made, according to most brokers. So to answer the question, yes, lenders will honour any offer already agreed upon.
Unfortunately, buyers, first-timers, and movers who have not already made an application will find that the offers available to them will be limited and significantly more expensive.
The previously good mortgage deals have been removed, and when new offers make a re-appearance, it will be considerably less of a “deal” and markedly more expensive.
If your application for a good deal is complete, then you are likely to be lucky enough to have secured a specific rate; however, if it is just “agreed in principle,” the likelihood is that the rate offered is not binding and therefore can be withdrawn by the lender.
It is important, however, to note that if you are already on a deal with a fixed interest rate, the lender cannot change the rate until the deal expires.
Will my home be repossessed?
With many fixed rates coming to an end and an almost certain increase in monthly mortgage repayments, many homeowners are asking themselves if their homes could be repossessed. Although this is a possibility, the whole process of repossession is lengthy for lenders and one they will try to avoid.
It’s more likely that a lender will offer some sort of payment plan for those struggling with their monthly mortgage repayments.
If you are or feel you may, in the near future, not be able to meet your payment obligations, it is imperative that you seek help and advice. There are various charities, such as Citizens Advice, that are there to offer any support you may need.
What support can we expect from the government?
Following the pandemic, we have become somewhat accustomed to the government handing out support in various ways, for example, through furloughs and grants. Unfortunately, this will not be the case for homeowners struggling to pay their mortgages.
Instead, they will be doing what they can to get the economy back on track, although to date they have not been too successful in this endeavour.
Will renters be affected?
Well, mostly, yes. If landlords find themselves paying higher buy-to-rent mortgage payments, they will have little choice but to pass at least some of these increased costs onto their tenants.
Another side effect of the market chaos is a shortage of rentable properties, should landlords decide to sell up. With demand higher than supply, an inevitable increase in rental rates will be unavoidable due to the increased competition.
Renters who wish to get their foot on the property ladder will most likely need to wait longer to buy due to first-time mortgages being so expensive.
Why is the Bank of England increasing interest rates?
The theory is that by increasing base rates, people will be less likely to borrow and spend and more likely to save. This hopefully results in less demand for products and services, which in turn will result in prices going down.
With inflation at five times its target rate, the Bank of England is expected to keep increasing interest rates in order to get control over the spiralling inflation rate.
Although in theory, this should work, it is a balancing act that needs to be executed well, as we do not want the economy to slow down too much.
Do mortgage interest rates always fluctuate?
Yes, but we need to consider some factors, such as the fact that for the last decade, interest rates have been relatively low. Now that rates are on the rise, it has been a shock for many that even a small rise in rates has translated into quite significant rises in monthly payments. This is largely due to the amount buyers have borrowed due to high house prices and stagnant wages.
How will the rise in rates affect my mortgage?
The rise in base rates will result in mortgages becoming significantly more expensive. This will in turn have a negative effect on housing market activity, as buyers will be more hesitant to act now and will be more likely to be waiting to see what the future holds.
Should the rates stay high for a long period of time, mortgages will become unaffordable, many will sell, and house prices will inevitably decrease.
Mortgage Lenders Pull Mortgages as Unstable Property Market Continues to Cause Havoc for Buyers
A chaotic financial market has led many mortgage lenders to remove the availability of many mortgage products for new buyers following the Chancellor’s mini-budget announcement, released last week. Although thought to be a temporary measure by lenders, this is bad news for buyers wishing to find good deals when looking for new mortgage products.
The UK’s largest lender, Halifax, has removed all fee-paying products and replaced them with full fee-paying mortgage products. This means that customers can no longer pay an arrangement fee in return for a better (lower) interest rate than was previously available.
In an extreme move, Skipton Building Society and Virgin Money have taken the step of removing their entire range of products with the aim of relaunching new products later in the week.
The announcement from Kwarteng has sent the value of the pound and government bonds into free fall. The mini-budget was said to be created to help the growth of the economy by funding tax cuts with government lending.
“As a result of significant changes in the cost of funding, we’re making some changes to our product range,” a Halifax spokesperson said.
The 5-year government bond yield increased by a whopping 96 basis points on Monday and Friday, signifying the highest rise in borrowing costs since 1987, the year that Refinitiv began.
“Following last week’s (Bank of England) meeting and the government’s subsequent mini-budget, we continue to see the market response unfold,” Skipton Building Society said in an email to brokers.
“In response, we will be temporarily withdrawing our new business product range with immediate effect.”
New customers were advised that Virgin Money was intending to pull its mortgage products at 8 p.m. on the 26th.
“We continue to monitor the situation closely and currently plan to relaunch products for new customers towards the end of the week,” Virgin Money said.
Mortgage brokers advised that the likelihood of lenders making significant changes to mortgage product offerings was high.
“The uncertainty around the risk of an emergency rate rise is likely to see other lenders withdrawing products or increasing rates dramatically until they know the extent of how this all pans out,” said Jamie Lennox, director of Dimora Mortgages, a broker.
The Bank of England has suggested that they will adjust interest rates in order to bring inflation back to target levels.
“That will feed into higher mortgage rates, and, as always, it’ll be the taxpayer left carrying the can,” said Lewis Shaw, founder of broker Shaw Financial Services.